Bitcoin’s Taproot Upgrade Might Already Be Priced In

The Taproot upgrade has highlighted some investors’ skepticism of the Bitcoin network’s ability to adapt and expand.

Oct 26, 2021
CoinDesk Insights

The last time the Bitcoin network locked in a major upgrade, in July 2017, the bitcoin cryptocurrency’s price jumped almost 50% through Aug. 23, when the changes went live.

Now, as the original blockchain network prepares for its next big upgrade in November, known as Taproot, few investors are expecting a price reaction anywhere near that scale. BTC’s price has already doubled this year, and it hit a new all-time high near $69,000 in early November. While further gains are possible, Taproot alone likely won’t be the catalyst.

“The Taproot upgrade will have minimal impact on bitcoin’s price,” said Edward Moya, senior market analyst for the online foreign-exchange broker Oanda.

Set to go into effect on Nov. 14, the Taproot upgrade is designed to increase privacy protections on some transactions over the network through an innovation known as “Schnorr signatures.” The upgrade also will allow for more lightweight “smart contracts” – essentially programs stored on a blockchain that run when certain conditions are met. Smart contracts have been a key feature of the rival Ethereum network, powering fast growth in decentralized finance (DeFi) applications that aim to automate many functions of banks and trading firms.

“This is a revolutionary moment for Bitcoin,” said Don Guo, CEO of Broctagon Fintech Group.

Yet, the episode is serving to highlight a key difference in Bitcoin’s approach to network improvements versus competing blockchains where upgrades and tweaks are far more common. Ethereum, the No. 2 blockchain, just off the heels of its London hard fork in August and now pushing forward with its “Ethereum 2.0″ overhaul expected next year, has seen the price of ether, its native cryptocurrency, quintuple this year.

Is Taproot good for bitcoin?

Backers of Bitcoin say the slow-going approach simply shows how methodical and cautious its developers are – wary of doing anything that might hurt a revolutionary blockchain network that has defied most expectations since its introduction 12 years ago.

But some investors have grown more skeptical of the Bitcoin network’s ability to adapt and expand, worried that its first-mover advantage might be eroding. Given the rapid pace of development in the blockchain industry, four years without a major upgrade can seem like eons.

“Some may argue that Bitcoin’s lack of upgrades shows its technical superiority over Ethereum,” said Denis Vinokourov, head of research at Synergia Capital.

He said the Taproot implementation is likely to have a limited impact on the cryptocurrency’s price because the upgrade has been widely expected for years.

“The risk is the market will see it as being something that is already available elsewhere,” said Vinokourov.

Adam Back, CEO of Blockstream, and a protocol researcher, told CoinDesk in an interview that despite the infrequency of upgrades, hordes of developers are constantly working on network improvements in the background. Developers have been preparing for the Taproot upgrade since 2018, the year after the Segregated Witness, or “SegWit,” upgrade went through.

“This is a false story that people make, that Bitcoin is not developing very fast,” Back said. “People mistake the lengthy rigorous quality assurance as a lack of change. There is a pipeline of change and it’s large, but it has a slow release schedule because it needs testing.”

According to Back, “People get impatient because it has been a year since they heard about it in the press.”

“Competing coins do a lot of futuristic marketing about what might happen in five years,” he said.

Only four years ago …

If history were a guide, the upgrade could usher in big gains.

The 2017 upgrade that introduced SegWit improved Bitcoin’s scalability by “segregating” specific data from individual transactions, effectively making them smaller. This step allowed more transactions to be processed without increasing the size of individual data blocks.

Another key feature of the 2017 upgrade was the enabling of the Lightning Network, a secondary layer built on top of the Bitcoin base layer, which facilitates near-instantaneous, free and more private bitcoin transactions. The development of the Lightning Network since 2017 is what allowed it to become a linchpin of El Salvador’s push to make bitcoin legal tender alongside the U.S. dollar.

SegWit was approved on July 23. A month later, when the upgrade went live, the price of bitcoin had climbed 50%, to a then-astounding $4,247 on Aug. 23, 2017.

(Shuai Hao/CoinDesk)

Above: The turquoise vertical bar on bitcoin’s price chart highlights the price impact of the SegWit upgrade in 2017. It was a big jump at the time, though the cryptocurrency’s subsequent rally makes it look like a blip.

But with bitcoin now trading above $60,000, some investors think the cryptocurrency’s price rise might look – well, tapped out.

“There might be a limit to how much more upside you can really get from bitcoin,” Daniel Cawrey, COO at Cypherpunk Holdings Inc., a digital-asset investment firm. (Cawrey is a former CoinDesk reporter.)

“If you’re an institutional investor, it already looks like you’ve missed the boat,” said Cawrey. This is why investors are looking to Ethereum and a host of competing blockchains known as “Eth killers,” according to Cawrey.

What will Taproot enable?

Anton Chashchin, Managing Partner of Bitfrost.io, a blockchain middleware platform, said that the introduction of smart contracts could actually add to interest from institutional investors, given the potential for creating new products and applications.

The new privacy enhancements, on the other hand, might invite closer scrutiny from governments concerned about preventing tax evasion, money laundering and any illicit activities.

“While these can be attractive to private transactions, this may also arouse the suspicion of regulators,” Chashchin said. “There’s a lot of talk of regulations already, and this might be the last straw that makes regulators step in more aggressively.”

Cryptocurrency investors fretted over China’s crackdown on bitcoin miners in September. Concerns over the network’s energy usage and potential environmental harms remain paramount for many traditional investors.

It might be hard for investors to get much more bullish on bitcoin than they already are, with the price now having fully recovered all lost ground from the June low around $28,600. The long-awaited rollout of new U.S. exchange-traded funds (ETFs) focused on bitcoin futures started last week, with the ProShares Bitcoin Strategy ETF’s assets topping $1 billion in just two days. The Valkyrie Bitcoin Strategy ETF launched Friday. VanEck’s ETF is set to launch Tuesday.

But according to blockchain analysis firm IntoTheBlock, the Taproot upgrade might demonstrate that Bitcoin is a technology that can be adapted and upgraded without any impact on its reliability or uptime, while maintaining its investing thesis as a store of value.

“We expect that investors will receive these upgrades positively, and the price will continue increasing in the long term,” said Juan Pellicer, research analyst at IntoTheBlock.

Said Broctagon’s Guo: “With a successful technical implementation followed by increasing adoption, there is no reason why the price should not follow.”

UPDATE (Nov. 11, 2021, at 20:50 UTC): This article was changed to reflect current market conditions and to adjust the date of activation to Nov. 14.

DISCLOSURE

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

Lyllah Ledesma is a reporter on CoinDesk's Markets team. She holds bitcoin, ethereum, and small amounts of other crypto assets.